The Anatomy of Sustainability
49 Pages Posted: 11 May 2020 Last revised: 8 Oct 2020
Date Written: May 1, 2020
We present evidence that sustainability is inextricably linked with market-implied uncertainty and sentiment. We derive an econometric decomposition of sustainability ratings yielding three orthogonal components capturing uncertainty, investor sentiment, and an idiosyncratic sustainability factor. Examining the shock of the COVID-19 pandemic to the US stock market in light of these explanatory factors, we show that the perceived immunity of sustainable stocks during the crash is essentially driven through the uncertainty channel. Once controlling for uncertainty, sentiment and firm fundamentals, the positive relationship between idiosyncratic sustainability and resilience persists, albeit weakly.
Keywords: sustainable equity, ESG ratings, market crash, uncertainty, investor sentiment, ESG factor
JEL Classification: G01, G14, G41, C33, D81, D91
Suggested Citation: Suggested Citation